In the last few months, economic data all over the world showed that the spring shoots of national economies had begun sprouting out one by one (i.e. they emerged from recession). In Asia, the phrase ‘Spring Awakening’ could be used to describe it.
In the second quarter the economies of Germany, France and Japan stepped up out of recession. The USA and Euro Zone economies are also forecast to turn around in the third quarter, achieving real GDP growth. However, compared to Asian economic growth it pales into insignificance1. Using annualized quarter on quarter GDP growth, in Asian countries that have already released data, double figure increases were generally recorded (assuming the economy continues to grow at the same pace as in the second quarter, the annual economic growth rate would reach double figures). Growth in Singapore reached 21%, while China achieved growth of 15%. Growth in South Korea and Hong Kong was also impressive.
Has Asia boarded the express train to economic recovery? The answer is that it has boarded the train but the speed is still not express. The second quarter economic figures were for the most part due to stock replenishing. After the collapse of Lehmann Brothers, the global financial system was once close to freefall. The capital market was even more sluggish. With a great degree of panic, businesses took a ‘cash is king’ approach, using reserves as much as possible and not ordering new stock. This led to the most acute reduction in stocks since the War. When people’s minds emerge free from shock and financial liquidity is able to recover, reserve stocks can gradually begin to climb back up to normal levels. As a result production now exceeds consumption. Asia is the world’s factory, and has become the largest beneficiary of stock replenishing. However, the production figures for the second quarter are still unsustainable.
However, the foundation of the Asian economy is solid. This is clearly better than in Europe. Most of the Asian banks have not been involved with bad debts and risky securities, so have managed to escape from the disaster of the financial crisis2. Asian prosperity has certainly been hit, but the damage is light. Asia’s super-high savings rate and huge foreign currency reserves, acted to stabilize the economy during the crisis, establishing a good foundation for economic recovery.
In addition, during the crisis period, many Asian countries successively rolled out fiscal stimulus plans. Apart from the Chinese plan, the scale of all the other countries’ plans could not match those of the UK and the USA. However, since there was no need to bail out the banks, the Asian economic bailout plans seemed to give greater assistance to the economy as a whole.
In this cycle of recession and recovery, countries can roughly be separated into three classes:
Class 3: The capital of the banks, and the finances of individuals needs to be reorganized, so the ability to recover is weak (E.g. the USA, UK)
Class 2: There is no need for leveraging3, but domestic demand is not strong. Recovery speed is quite fast but lacking in vigour. (E.g. most of the Asian countries)
Class 1: Can increase leveraging and domestic demand is good. Recovery speed is quickest with great impetuous. This is the top class. (E.g. China)
The capital market acceleration and the resurgence in global financial liquidity has provided new impetuous for the Asian economy. However, I4 believe that the full recovery of this economic area still depends on a resurgence in exports. Although in the USA and Europe, GDP growth is recovering, the recovery from “no jobs, weak consumption” is likely to continue for a while. This also means that Asia’s recovery from “weak exports” is also likely to continue for a while. In the latter half of the year, the multiplier effect will make the export figures look a little better. However, I am even more concerned about news regarding export businesses in Guangdong and Eastern China hiring new workers .
This article was originally published in Today Magazine. It is only an individual opinion and certainly not advice or an investment suggestion.
Notes: 1 小巫见大巫: A Chinese idiom literally meaning 'the small witch sees the big witch'. I.e. greatly inferior, small by comparison.
2 金融海啸 Literally: financial tsunami
3 Leveraging: A process by which the return on an investment can be increased, usually by borrowing to invest.
4 笔者: A formal expression meaning the author.